when a company takes over another company by purchasing most, if not all, of its shares.
How an Acquisition Process Works
If one entity owns more than 50% of a company’s share, it can effectively control how the company is run without needing the other shareholders’ permission. Companies undertake cquisitions usually due to the following reasons:
- control the target company’s strength, something that the acquiring company wants, but can’t or won’t develop itself.
- incur potential synergies so the combined value of the two companies is larger than the individual companies.
Acquisitions are a great way for companies who are looking to expand their business rapidly in a short time. They don’t have to develop a new technology because the target company already has it. The company increases its market value, potentially improving the market share of its products as well. Compared to the conventional way of slow growth such as marketing, acquisitions are comparatively less risky and faster.
Just like any other business decision, however, acquisitions are not a foolproof way to success. Some things can go wrong in an acquisition effort including failed synergies, culture clashes, a lower-than-expected value of assets, and conflicting goals of both companies. That’s why it’s important to properly scrutinize the strengths and weaknesses of such a substantial business decision. With that said, even from well-thought-out plans, there’s still no guarantee that acquisitions will always be fruitful.
Real World Example of an Acquisition Process
One of the most famous acquisition process events in the 21st century is Google’s acquisition of YouTube in 2006. YouTube, which was only one year old at the time, was originally a dating platform with the tagline of "Tune In, Hook Up." However, after the creators, Chad Hurley, Steve Chen, and Jawed Karim, realized that there was no video-sharing platform back then, they made changes to the site and made it the first major video-sharing platform.
From May 2005 to November 2005, site traffic grew tremendously from 30,000 daily views to around two million views per day. By March 2006, the total video uploads on the site reached more than 25 million with around 20,000 new videos were uploaded every day. Not only that, the viewership in the summer that year also averaged around 100 million views per day. Unfortunately, this rapid growth also came with a cost. Hurley, Chen, and Karim didn’t have the equipment necessary to host such a huge userbase. Copyright infringement on some videos on the site was also an issue.
This was where Google came in. At the start, Google’s involvement was simply to be the outsource help for the video platform. However, amid its failure to create its own video-sharing platform, Google decided to take a different step. In October 2006, Google purchased the majority of YouTube’s stock worth $1.65 billion, making it Google’s biggest acquisition at the time. Since then, Youtube rises to dominate the global media, surpassing any TV station in the world while also birthing some of the most well-known internet celebrities.
Significance of an Acquisition Process
Acquisitions happen now and then, especially between small to medium firms. This is the case as acquisitions provide a lot of potential benefits. For instance, it can be a way for companies to enter into a new or foreign market. By purchasing a business that already has brand popularity and personnel, it will help the acquiring companies to get a solid footing as well as reducing the barrier of entry.
Another potential advantage is the decrease in competition. If there are too many suppliers of the same type of product on the market, it will hurt the firms involved. By acquiring or merging with another company, it will effectively reduce competition and let investors focus on the most productive providers. Additionally, acquiring another company also allows the acquirer to gain fresh perspectives to help reach its business objective.
With that said, just like mentioned in a previous section, the acquisition process still has its own risks. To increase the chance of a successful endeavor, there are some things that a company can do.
- Investigate the level of debt of the target company.
- Make sure that the target company has a healthy and transparent financial condition to avoid any undesirable revelation.
- Ensure that the target company doesn’t have too many problems with the law.
- Negotiate a price that is satisfactory to both parties.
Types of Acquisition Processes
Generally, there are two types of acquisitions: a hostile acquisition process and a friendly acquisition process. A hostile acquisition happens when a company buys another company without its consent. This can be done if the acquiring company purchases a large number of stocks in order to control the interest of the target company, even though there is no mutual agreement between the two beforehand. Hostile acquisitions are also known as hostile takeovers or simply “takeover.”
On the other hand, friendly acquisition happens if both corporations amicably agree to the terms of the purchase. Before they finalize the deal, the board of directors has already discussed the venture. A friendly acquisition process also assures that the acquiring company has the appropriate assets along with the responsibilities.
Acquisition Process vs. Merger Process
An acquisition process and merger process are similar in that both of them refer to an event where two companies join together to expand their business. However, instead of taking over, a merger happens when two companies of approximately the same size and power merge into a single entity. With this, none of them become the owner or the owned but equals.
One example is the 2003 merger between two of the largest video game corporations in Japan: Square and Enix. To proceed with the merger, both firms agreed that each share of Square’s common stock would be traded for 0.85 shares of Enix’s common stock. The main goal of the merger process is to reduce the development costs of creating games and to compete with foreign developers. Square was also looking for better financial stability as the company was suffering a major financial loss in 2001 resulting from the failure of its’s first movie, Final Fantasy: The Spirits Within.